Bluelinx Holdings Inc (BXC) 2014 Q1 法說會逐字稿

Good morning. My name is Toni and I will be your conference operator today. At this time, I would like to welcome everyone to the BlueLinx first quarter earnings release conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period. (Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded today, May 8, 2014. Thank you.

I would now like to introduce Maryon Davis with BlueLinx. You may begin your conference.

Thank you, Toni. Good morning. Thank you for joining us for the BlueLinx first quarter 2014 earnings conference call. This call is being webcast on the Company's website at BlueLinxCo.com. The earnings release and presentation slides for this call can be found in the investor relations section of the Company's website.

This presentation includes statements about our expectations for future operational and financial performance that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to a number of risks, uncertainties, and assumptions that could cause our actual results to differ materially from those provided, including, but not limited to, risks and uncertainties with respect to economic, governmental, and technological factors outside of our control and changes in the supply and/or demand for products we distribute, particularly as a result of conditions in the residential housing market. These and other factors that could cause actual results to differ materially from forward-looking statements are discussed in greater detail in our filings with the Securities and Exchange Commission.

Forward-looking statements speak only as of the date of this presentation. We undertake no obligation to revise them in light of new information. Finally, we undertake no obligation to review or confirm analyst expectations or estimates that might be derived from this presentation.

This presentation includes references to adjusted net loss and adjusted EBITDA, which are non-GAAP financial measures within the Securities and Exchange Commission's Regulation G. Reconciliations of GAAP net loss to adjusted net loss, and GAAP net loss to adjusted EBITDA, are included as an appendix and are posted on our website at BlueLinxCo.com.

Our speakers this morning are Mitch Lewis, Chief Executive Officer, and Doug Goforth, Chief Financial Officer. Doug will begin the call this morning with a review of the financial statement. Then, Mitch will comment on the current results and add a final perspective before opening the call to your questions.

Now, let me turn the call over to our Chief Financial Officer, Doug Goforth.

Thank you, Maryon. Good morning, everyone. It is a pleasure to speak to you again about our business and our first quarter results. For those of you following along with the slides posted on the investor relations section of the BlueLinx website, I will begin with slide 5.

Revenues for the first fiscal quarter ended April 5, 2014, decreased 11.8% to $443.9 million from $503.2 million for the fiscal first quarter ended March 30, 2013.

On a same center basis, 2014 first-quarter revenue decreased $29.8 million or 6.3% compared to the fiscal first quarter of 2013. The sales decline mainly was due to weather impact on structural unit volume as well as certain product price declines relative to year-ago levels.

Gross profit for the fiscal first quarter ended April 5, 2014 totaled $52.7 million, down 6.7% from $56.5 million in the year ago period. Gross profit from a same center basis with the 2014 fiscal first quarter decreased $0.4 million or 0.7% compared to the fiscal first quarter of 2013. Gross margins for the 2014 fiscal first quarter improved to 11.9% compared to 11.2% for the same period a year ago.

Overall, 2014 fiscal first quarter gross margins were impacted by lower structural wood-based product prices compared to last year's first quarter elevated structural wood-based product prices, and a customs rebate of $1.4 million related to the prior year, which was recorded in the fiscal first quarter of 2014.

Total operating expenses were $54.3 million compared to $61.6 million for the same period a year ago. Significant special items included in our operating expenses for the 2014 fiscal first quarter included a $0.2 million gain from the sale of property. Significant special items included in operating expenses in the year ago quarter included a $0.2 million gain from the sale of property and $0.9 million in restructuring and severance costs.

Operating expenses in the year ago period also included $3.6 million in expenses related to closed distribution centers. Reported operating loss for the 2014 fiscal first quarter improved to $1.7 million compared to an operating loss of $5.1 million a year ago, and reflects a reduction in expenses that more than offset the decline in revenue and the significant special items.

Adjusted EBITDA for the 2014 fiscal first quarter improved to $1 million from an adjusted EBITDA loss of $1.4 million for the same period a year ago. The Company incurred a net loss of $8.6 million or $0.10 per diluted share for the fiscal first quarter of 2014, compared with a net loss of $12.6 million or $0.19 per diluted share for the fiscal first quarter of 2013.

Fiscal first-quarter results for 2014 included net pretax gains from significant special items of $2 million and resulted in no impact on diluted earnings per share. Fiscal first quarter results for 2013 included net pretax charges from significant special items, $0.9 million or $0.01 per diluted share.

Fiscal 2014 first quarter adjusted net loss was $5.8 million or $0.07 per diluted share compared to an adjusted net loss of $7.2 million or $0.11 per diluted share for the same period a year ago. The reported net loss for the period is after interest expense of $6.5 million compared to interest expense of $7.2 million in the prior year period. The current year net loss is after a tax provision of approximately $0.3 million compared to a tax provision of approximately $0.2 million in the year ago period.

Turning to cash flow on slide 6, during the quarter we used approximately $46 million cash from operating activities, mainly reflecting increases in primary working capital components. This compares with a net cash used by operations of approximately $96 million in the first quarter of 2013.

As we have discussed on prior earnings calls, we will continue to tightly manage our working capital items on an ongoing basis. But as always, we expect to consume cash through the first half of the year as our working capital increases to support the normal seasonal increases in our business.

Moving to slide 7, we had approximately $89 million of excess available under our revolving credit facilities as of quarter end. That is approximately $46 million above our minimum availability requirement on our US revolving credit facility as of April 5, 2014. The combined debt balance on our mortgage and revolving credit agreements was $447.4 million. Net debt at the fiscal first-quarter ended April 5, 2014 was approximately $439 million and was flat compared to the first quarter ended March 30, 2013.

During the fiscal first quarter of 2014, the Company entered into an amendment to its US revolving credit agreements with a syndicate of banks led by Wells Fargo who improved liquidity to provide up to an additional $20 million in availability for strategic growth plans. The amended credit facility provides for up to an additional $20 million in borrowings past-due for a period up to 180 days from the effective date. The initial funds drawn at closing of $20 million were used to pay down the existing asset-based revolving [credits].

Turning to slide 8, [past] cycle days in the fiscal first quarter ended April 5, 2014 totaled 65. That compares with 60 days sequentially and 61 days for the same period a year ago. The year-over-year increase in cash cycle days as a result of investments in inventory for both anticipated seasonal demand and to support our ongoing specialty product focus.

Finally, I would like to take a minute to talk about my departure. I first joined the Company in 2002 and was here when BlueLinx was formed 10 years ago on May 7, 2004, the anniversary that we have been celebrating all week. It has been a privilege to work with so many dedicated people, and I want to thank everyone at BlueLinx, including the Board of Directors, for the support they have given me over the past six years that I have served as CFO. I will miss working with everyone a great deal.

Leaving is not a decision I made lightly, but I believe that BlueLinx is now on the right path and it is the right time for me to do something new. Also believe that Susan is going to be a great addition to the team. While there remains much to accomplish, I feel fortunate that we had such a dedicated team of tigers eager to support the new CFO as she steps into the role.

That concludes my remarks. Now let me turn the call over to Mitch.

Thanks, Doug, and good morning. I will address Doug's departure and our new CFO in a few minutes, but I would like to begin by discussing what we are seeing in our end markets.

I think it is important to remember that, while total residential housing starts drive a significant portion of our business, we are much more reliant on single-family housing starts where we estimate we derive approximately 40% of our revenues. Multifamily starts only represent 4% of our sales volume, so we will keep the emphasis on single-family housing starts to assess our performance against the residential new construction markets.

Single-family housing starts for the first quarter were down 1.7% from 2013 levels, while our same center sales were down 6.3%, and this disparity certainly warrants an explanation. Slide 11 indicates the primary culprit. Our two largest markets are in the Midwest and Northeast, and these markets were significantly down in the first quarter due to the extreme winter these areas of the country endured.

On a consolidated basis, BlueLinx lost about three full shipping days among our facilities compared to 2013 in the first quarter due to this inclement weather. Second major issue we had that impacted our topline was market pricing degradation with some of our structural-based product categories. This resulted from a drop in the underlying cost of these products, which we estimate reduced our net sales in the quarter by approximately $12.8 million.

Today, our markets appear to be rebounding. While the beginning of the second quarter was a bit choppy, we have begun to enjoy a seasonal uptick in our business, particularly over the last couple of weeks. Our customers remained relatively optimistic and believe that the back half of 2014 will be strong.

You can see on slide 12, the good news is that even with a sales decline, our EBITDA improved from last year's levels. And, while adjusted EBITDA at $1 million is certainly not a level that the BlueLinx team is proud of, it was a $2.4 million improvement from last year. In addition, it is the first positive EBITDA that we have had in our seasonally challenging first quarter since 2007.

I think most importantly, we believe the fact that we were able to generate positive adjusted EBITDA on a relatively low volume bodes very well for 2014 as the seasonality of our business improves.

There are a couple of main factors which drove our improvement in the first quarter. Our overall gross margins rose as our mix of specialty products improved. We also continue to realize the benefit from the significant fixed costs we took out of the business last year. And, as we discussed last quarter, we anticipated that the fixed costs we eliminated in 2013 would have a material positive impact on our performance, and this certainly was the case.

Same center costs for the first quarter associated with fixed sales, procurement, and administrative expenses declined by about $3.6 million compared to the first quarter in 2013. And this follows in line with our expectations of an approximate incremental $6.5 million savings in 2014, compared to 2013 from our SG&A cost-cutting measures.

Slide 13 indicates the gross margin improvement in our two major categories, structural and specialty products. As Doug indicated, our mix shifted more to specialty products in the first quarter, which helped the consolidated gross margin performance.

While we continue to emphasize growth in our specialty markets, the mix change in the first quarter was more a function of the decline in commodity prices I alluded to previously. We certainly are intent to continue to emphasize sales in both our structural and specialty product categories.

Slide 14 addresses several of the key activities that are ongoing at BlueLinx. We have been very focused on the liquidity of the organization and are pleased that we ended the quarter with availability of approximately $89 million. And this represents about a $44 million increase from year-end.

As Doug discussed, historically we use cash in the first two quarters of the year and generate cash in the back half of the year. And we expect this trend to continue in 2014. But you should be aware that we are in discussions regarding financing alternatives as a mechanism to lay a foundation for the growth at BlueLinx that we anticipate in the years ahead.

We are investing in improving our inventory process and management at BlueLinx. We need to ensure that we operate at inventory levels with maximum efficiency that provides sufficient inventory to continue to provide great service to our customers, while reducing our working capital investment. And we will continue to keep our eye on the ball on the expense side of the business. But rest assured that we will not get complacent after the disruptive cost-cutting we underwent in 2013.

We also clearly understand the solid vendor relationships that are critical to our long-term success. We have engaged in meaningful strategic discussions with several key suppliers to help us mutually grow our businesses and strengthen our product offering into the industry.

We have now changed our operational structure and are bringing in some talented associates with strong logistics and material handling expertise to drive improvements and efficiencies in the way we interact and provide service to our customers. We will continue to look for opportunities to enhance our margins through product innovation, cross-selling, and market-driven initiatives.

So before we open up the call for questions, I would like to discuss the announcement we made today that Doug is leaving BlueLinx and being replaced by Susan O'Farrell. Doug has been in the CFO role now for six years, and he had the unique challenge of being good CFO during a tumultuous period in our Company's history. He has helped build a terrific accounting, finance, and IT team, which ensures strong continuity for these functions going forward for BlueLinx. And, on behalf of the entire BlueLinx team, I want to thank Doug for all his contributions to our organization.

I am very pleased to be able to inform you that Susan O'Farrell will begin as our new CFO on May 19. Susan has been in the building products industry for the past 15 years, holding senior finance and accounting roles at The Home Depot. Until couple of weeks ago, she was responsible for the finance function of The Home Depot's at-home services group, and she began her tenure at Home Depot in 1999, leading several finance, accounting, and strategic teams that supported the retail organization.

Prior to Home Depot, Susan held a strategic information systems role at AGL Resources and she was an associate partner at Anderson Consulting before that. I know Susan will be a great leader for BlueLinx and a fantastic strategic and innovative partner to help our team assess and drive improvement in the organization. I truly believe we are fortunate to have convinced her to join the BlueLinx family, and I really look forward to you getting to know her in the months and years ahead.

In conclusion, I have been on the job now for almost four months. And, while I do think we have made solid progress in many areas, there is a lot of work and a lot of tremendous opportunity that remains here. We are questioning everything we do at BlueLinx and we certainly expect to continue to improve our organization and our results in the months ahead.

So with that said, we would like to open up the lines to any questions we might have.

(Operator Instructions) Tristan Thomas, Sidoti & Company.

One really quick question right off the bat. The same center cost savings -- what was that number again year-over-year?

Operating expenses, $3.6 million.

Okay. And that is in line with what you expected or--?

(multiple speakers) yes. The answer is yes. So we anticipated annual savings in the $13 million range -- a little more than that. From all the efforts that we had in 2013, we realized about half of that. So obviously, we started realizing more of that as the year progressed.

Okay. Got you. And then, so do you expect more cost-cutting in 2014 or do you think (multiple speakers)?

No. It is not a key part of what we are focused on right now. I mean, we are trying to stabilize the organization. Ultimately, this business has tremendous opportunity from an efficiency standpoint in what we are doing, and we are looking to grow this business long-term.

Okay. Got you. Another quick question. Just regarding some of the structural wood-based pricing, what do you expect for the rest of the year? Do you think it's going to continue downward? Or do you think we are going to stabilize at some point?

That's a great question. I am chuckling because we have a lot of dialogue about this internally. And I could tell you, generally, if you put 10 people in the room, you would get widely disparate views. I will say, over the last few weeks the view is that it has stabilized. And the short-term view is that we should see some upside on the underlying prices.

Okay. Then, just to come back around to some of your structural revenue and how it affected gross margin, should I look at it moving forward that, as that increases, obviously gross margin is going to decrease? Do you think this is a little bit unstable just based on the product mix?

Yes. So I would answer that a couple of ways. One is we have put a lot of emphasis -- in fact, elevated the role of an individual in the organization, and they are having a lot of dialogue about improving and enhancing margins in all of our product categories. So we are attacking the ability to improve margins across the Company, and we are trying to look at leveraging opportunities that we have with our customers to move higher margin products in there.

But from a mathematical standpoint, if the percentage of our structural sales increases relative to specialty sales, it would drive down the overall gross margins of the business.

You will see in the first quarter, obviously, the specialty mix actually grew, and we had slight growth in specialty. In terms of gross margin, we continue to see improvement. If you take out the customs rebate, we were still at approximately 11.6% gross margin, which, again, so we continue to increase. That is up on a quarter over quarter sequential basis. So we continue to go in the right direction.

Okay. Sounds good. And then, obviously, with the weather really impacted January and February, and it seemed that picked up in the second half of margin, should I look for an even better second quarter than usual just because it's some pent-up demand getting pushed back? Or do you think -- I'm just curious what you are hearing from [those and] the builders.

Yes. I think over the last -- so, consistently, and surprisingly consistently, what we are hearing from our customer base is has been very optimistic, even in February they felt really good about the full year. And we continue to hear that.

And, as I mentioned, the first couple of weeks of the second quarter felt a little choppy, and we started scratching our heads trying to ascertain whether or not their optimism would be realized. But in the last two weeks or so, we have really seen significant seasonal improvement in the business and we are starting to get pretty busy. How that ultimately will compare, topline to the last year from a volume standpoint, it is a little too early to tell.

It certainly looks like spring is here.

Finally.

Absolutely.

And then just one final question. Could you maybe comment a little bit on what you are doing with some of your IT initiatives and where that stands?

I'm sorry. Could you repeat the question?

Could you just comment a little bit on where some of your new IT initiatives stand? I know you are in that trial with Home Depot for a contractor supply, right?

Right. There's actually a couple of things going on, on the IT front, some of which is being driven by Mitch and it is internal. We are working on enhancing and improving our contribution margin tool and that is ready to go live.

He talked about the elevation of the person who is working on improving our overall margin performance and that team. And that is something that we have been able to leverage our systems as well. I mean, we talk about our systems a lot in the past and we still continue to believe that they are one of the best within our industry.

On the e-commerce side, that has continued to roll forward. And we are actually now working with some of the dealer customers to roll that out with them. We are operational in the home center side of the business; frankly, not necessarily seeing the traction that we had hoped for there, but the dealers are very excited about the opportunity.

The one thing I would add to Doug's comments also is we are also -- and we are piloting as we speak and we are going to elevate a pilot -- looking at, I would say, our outside sales reps with customer-facing opportunities to both enhance our marketing and sophistication of the Company, but also to make it more efficient for our team to service our customer better. Whether it is pricing -- quick pricing information in the field; whether it is quick orders in the field, and really strong sales tools information, that is another project that we have that is a high priority for the organization.

Okay. And do you have any timeframe on maybe completing some of these or is a little too early to tell?

Yes, we have a lot going -- well, as Doug alluded to, the contribution margin tool, which is of course very important, is now up and running. So we have got that going. As I mentioned, the pilot projects are moving.

We are upgrading the phone system. That will give us some great analytics. All of this will be done -- should all be completed by the end of the year, but a lot of it is rolling out as we speak.

Mark Kaufman, MLK Investment Management.

I just had a couple of questions. One, what are you seeing in the home remodeling channels, if anything is different from last year or last quarter? And also, talking about financing, seems like there is probably an opportunity here to refinance the mortgage debt, and what your thoughts are there relative to today's value to June 2006 appraised value of $329 million and balance right now of $186 million on those properties.

This is Mitch. Okay. I will answer your questions in reverse order. As far as the financing, I think I alluded to the fact that we are out there talking to folks. And, obviously, our real estate is a significant asset on our balance sheet that is under-levered.

So, depending on financing alternatives and, as you know, there are several, and I think whoever would potentially be lending us money would look to the real estate as an opportunity to lever the Company if we wanted to, utilizing that asset. So the valuation from 2006 -- Doug, correct me if I am wrong here -- is in the $330 million range with (multiple speakers).

It's $329 million.

And so we have not done a recent appraisal on those properties, but we have had transactions with some of those properties, and the vast majority of them have sold for in excess of the appraisal. So we feel like that appraised value, without knowing for sure, we feel pretty good about that appraised value.

On the home improvement market, we are making good progress, as you can -- and the repair and remodeling piece, where making good progress, as we talked about on the specialty mix for our business, which goes into that segment. It is about 40% of what we do. Generally, we felt like there was some softness in the first quarter, and similarly to what we are seeing across the Company in the last two to three weeks, it really feels like things are starting to pop.

And, Mark, this is Doug. I would just add on the real estate side, of the dozen properties that we have sold, all but one have been at or above that original 2006 appraised value. And we are actually under contract on one of the facilities out West that we closed in the third quarter of last year. We expect that to close in the second quarter and, again, that is above those original appraised values.

So I think it is important to note that we feel confident still in those 2006 values. Obviously, it will be reappraised with any new financing that we do. Also, it is important to note that those properties on our books are because of the bargain purchase that we got in 2004 from Georgia-Pacific, got a net book value just under $85 million. So a lot of people miss that when they are looking at the Company, and just as Mitch talked about, the value of that real estate and the leverage possibilities there.

I can guarantee you, I haven't mix missed that fact, that real estate. And, when I look at this Company, it is almost -- at this price on the stock, it is a Graham Dodd, basically, analysis. If we liquidated this Company tomorrow, it is worth more than where the stock is trading based on appraisal values. But I thank you for elucidating me on that. And good luck, Doug.

And there seem to be no further questions at this time. I would now like to turn the call back over to Mr. Lewis for closing remarks.

Okay. Well, thank you. We certainly appreciate your interest and your continued support and we look forward to continuing to have positive communications in the future. Thanks. Have a great day.

Thank you for your participation. This does conclude today's conference call. You may now disconnect.